The Management Structure of a WFOE

by Richard Hoffmann

There are a lot of aspects one has to consider, when setting up a WFOE in China. Choosing a board of directors or better an Executive Director? A Board of Supervisors or only one? And what would be their duties? In this article we would like to give you some answers to these questions.

Management Structure:

In general, there are two management structures applicable for WFOEs in China. The first one is a Board of Directors leading the company. The Board of Directors shall consist of at least three directors. One of them has to be the Chairman. The other possibility is a WFOE with only one Executive Director. This option is normally chosen if a company only has very few Shareholders (or only one Shareholder) or just a small business scale. The Executive Director has the same responsibilities as the Board of Directors. Having one of these two options is obligatory for the WFOE in China and the result of this question determines who decides all major managing issues concerning the company.

The Shareholders however, are the highest authority of a WFOE and they have the right to make fundamental decisions in relation to all major issues of the WFOE.

It is also the shareholders, who appoint the board of managing Directors or the Executive Director. The Board of managing Directors or the Executive Director are indebted to the Shareholders will, are therefore obliged to execute their resolutions and furthermore to give report to them.

Legislative period of the Directors or the Executive Director:

The mandate for the Directors or the Executive Director shall not exceed three years. However they can be re-appointed.

Board of Directors/ Executive Director´s Responsibilities:

The Board of managing Directors or the Executive Director are indebted to the Shareholders and shall execute the following functions:

1. Convening the Shareholders´ meeting and report to the Shareholders;
2. Executing the Shareholders´ resolutions;
3. Working out the corporate strategy and the company’s investment plans;
4. Working out the company’s annual financial budget plans and final accounting plans;
5. Working out the company’s profit distribution plans and loss recovery plans;
6. Working out the company’s plans on the increase or decrease of the registered capital and/or the total investment amount, as well as on the issuance of corporate bonds;
7. Working out the company’s M&A plans concerning possible divisions, dissolutions or liquidations of the company as well as the change of the company’s legal form;
8. Making decisions on the establishment of the company’s internal management departments;
9. Appointing and dismissing the General Manager and determining his remuneration as well as upon the General Manager’s recommendation appointing and dismissing the other Senior Management Personnel and determining their remunerations;
10. Working out the basic rules and policies of the company;
11. Other responsibilities stipulated by the Articles of Association.

Board of Supervisors / Supervisor

The WFOE shall establish a Board of Supervisors consisting of not less than three members. However, WFOEs of a smaller scale with a small number of shareholders are allowed to only appoint one to two Supervisors instead of a Board of Supervisors.

The mandate of a Supervisor should be three years with the possibility of re-appointment. No Director or member of the Senior Management of the company may concurrently serve as a Supervisor.

The Board of Supervisors or the Supervisor(s) of a company should have the following functions and responsibilities:

1. Inspecting the financial affairs of the company;
2. Supervising the performance and duties of the Directors and the Senior Managers and proposing the removal of any Director or Senior Manager who violates any law, administrative regulation, the Articles of Association or any resolution of the Shareholders’ meetings;
3. Requiring any Director or Senior Managers to take corrective action if his/her actions damage the interests of the company;
4. Proposing the convention of interim Shareholders’ meetings and disclose any misbehavior at which the Board of Directors/Executive Director has not exercised its functions prescribed by law;
5. Putting forward proposals at Shareholders’ meetings;
6. Initiating lawsuits against a Director or Senior Management; and
7. Any other function or power specified in the Articles of Association.

If you would like to learn more about settng up WFOEs in China or have any inquiries, please do not hesitate to contact us via the following email address: Richard.hoffmann@ecovis.com

We would be more than happy to assist you